Honestly speaking: Manu Jain on Xiaomi’s unique business model, cracking offline market and beating Samsung

In a freewheeling conversation with Financial Express Online, Xiaomi India MD Manu Jain spills the beans on what it takes to be number one in the world’s fastest growing smartphone market.

Manu Kumar Jain, Global VP Xiaomi and MD Xiaomi India
Manu Kumar Jain, Global VP Xiaomi and MD Xiaomi India

When Xiaomi was looking to start its India business about seven years ago, Manu Kumar Jain seemed just the right man to kickstart the proceedings. He co-founded the e-commerce company Jabong and had worked at McKinsey & Company for 5 years, prior to that. He had also known the founders of the company through common friends. It seemed like a great opportunity, so he decided to take it up, and the rest as they say, is history.

During the early days – this was in March 2014 – Manu’s home was his office. And the one after that, was at a cafe nearby where he used to host his meetings. Sometime in July, just before their first launch, he rented a small six-seater room in a shared office space. In case it wasn’t clear, Manu was the only team member at that point of time. People would ask him about his team all the time.

“I used to joke at that time that I am the head, I am the tail, I am everybody. I used to do almost anything and everything,” Manu tells Financial Express Online. “Those were interesting times,” he adds.

On July 15, Xiaomi launched its first product in India – the Mi 3. It was also the day the company onboarded its second hire. Manu finally had somebody to talk to.

The initial business plan was to sell 10,000 Mi 3 phones a week and have a 10-member team eventually. The office needed an upgrade too, one more time. This time, it had to be big enough to seat 12-15 people, at least. The Redmi 1S and Redmi Note 4G were launched soon after.

During the company’s first Diwali, somebody had a “crazy” idea of selling 1 lakh units. Even more, if possible. A charter plane was flown in from China to bring the devices to India.

In 2015, Xiaomi launched its first phone designed for India, the Mi 4i and its first ecosystem product, the Mi Band. This was also the year it started sales on Mi.com, its e-commerce platform. Xiaomi was playing to its strengths. The online store would go on to become the third largest e-commerce platform and largest single brand e-commerce platform in India.

Learning things, the hard way

In 2016, Xiaomi started selling its products through a retail chain called the MobileStore. The company also appointed some distributors and tried a few experiments in a few pockets of the country. None of them worked out. Manu says it was because they were trying to simply copy what other brands had been doing in that space for a while. Xiaomi was not being true to itself.

Contrary to the norm, Xiaomi did not have a huge marketing budget. It did not have a lot of money to give to distributors or retailers, or to have any promoters to “chase” customers. Almost everybody was unhappy because the company couldn’t spare a margin for anybody and therefore, “nobody focused on us and because nobody focused on us, we couldn’t win,” Manu says.

“We are a pull brand. Inherently, 80-90% of our sales come because people come asking for our products. That isn’t the case with many other brands. There, when people walk into a shop, the promoter will do the magic,” he explains, adding “our core philosophy is, we will build great products with great quality, great price and then people will automatically come and search for them.”

Xiaomi learned it the hard way, but it was quick to change its offline model completely after realising this. The company went on to cut the middleman out completely as much as possible by setting up its own shops. This would help it save on margins and provide a great experience to consumers.

In the instances where it would be working with distributors – through Mi Preferred Partner stores and Mi stores – it would have only one level of distribution between the company and the retailer. Then, instead of forcing the retailer to pick up a few thousand units, it would ask them to pick only a few units every week, and then using technology, it would try and replenish them faster. Lastly, it would have limited width of distribution. If there were 100 shops selling smartphones in an area, Xiaomi would be present in only two or three big shops, those who were willing to focus on the company and its products.

For instance, if there were 100 phones being sold through 100 shops and Xiaomi had a 30% market share, these 30% customers were buying from only two or three of those shops depending upon the size of the market and hence each of these shops would end up selling 10-10 phones.

“Even though our margin is lower, but because the throughput is higher and because we’re asking them to buy less inventory, the return on investment (ROI) that they own on our investment is significantly higher,” Manu explains.

Today, Xiaomi products are sold through about 15,000 shops out of which 3,000 are exclusive and 12,000 are non-exclusive or Mi Preferred partners. The company is planning to double its exclusive store count to about 6,000 over the next two years assuming there’s no third or fourth wave of COVID. Since a majority of people who would be opening these shops would be first time entrepreneurs, they would require training and financial support, Manu says, adding Xiaomi has earmarked a fund of 100 crores for this purpose.

Honestly speaking

By Q3 2017, Xiaomi had overtaken Samsung to become the largest smartphone brand in India within three years of launch. The Korean tech giant has failed to catch up, ever since. A large part of Xiaomi’s success can be attributed to a knack for delivering terrific value through products that, more often than not, punch above their weight class.

Honest pricing is a recurring theme. It’s a culmination of two things. Firstly, the company will try to cut down on all possible costs as much as it can. For some context, Xiaomi has one of the leanest distribution networks across the world. It has one of the lowest marketing spends. Its working capital costs are also one of the lowest. Secondly, Xiaomi has been limiting income from its consumer hardware products after-tax profits to 5% since 2018. This is a company policy.

The benefits are then passed on to its customers. Question is, how is Xiaomi making profit after all this. Manu believes, 5% profit margin is good enough.

“We want our customers to be our friends from a long-term perspective and for that, we need to control our greed. We are not in a hurry because our objective is not to make this company big and sell it to somebody else. We are building this company for the next 50-100 years. Our goal is to win the trust of our users,” he says.

On top of this, “wherever possible, we will try and make money from our Internet services and that should be good enough,” he adds.

Controversy’s own child

For those unaware, Xiaomi is an Internet company first and a hardware company later. MIUI, which is the software that drives most of its smartphones, was its first product. One of the ways the company makes money is through targeted advertising. Though, for some reason, it did not tap this resource for almost four years after setting base in India.

Eventually it did start serving ads in MIUI in 2018, but without any prior intimation. The move expectedly did not go down well with critics while simultaneously opening a window of opportunity for some rivals to exploit. To be clear, Xiaomi was not the only company doing this but the reason why it triggered a response was because of the nature of the company. For a company like Xiaomi that must remain in the public eye to make a selling, sharing its every move on social media, the sheer secrecy with which it started showing ads was a bit questionable.

Manu says that was never the case. Things were rather blown out of proportion.

“It’s not that we didn’t speak about it. We probably got a lot of limelight because we spoke about it a lot more than anybody else. We always said we have an Internet model, we want to monetise our phones, we want to monetise our content, we want to monetise our UI and hence everybody looked at it from a very microscopic view, a lot more than what they did for any other brand.”

He goes on to explain why ads were introduced in the first place, so the company could offer services like themes and music free of charge to users. It’s similar to any other theme store or third-party music streaming app. There have never been any system-level ads in Xiaomi phones, he adds.

Still, the company is now cutting down on ads on the basis of feedback, as it’s cutting down on bloatware to make way for what’s being called the “cleanest UI possible,” aka MIUI 12.5.

“I can confidently say if you look at any phone in the country whether it is Android or iOS, we will probably have the cleanest UI possible. There are no ads and there is no bloatware. You can delete almost every single app, except for 6-7 core apps. Our themes and music app are also now removable,” Manu says.

It’s a bold move, again, to take a U-turn on something like this. But those keeping track would know, Xiaomi is probably one of the very few tech companies that takes feedback very seriously and is quick to make changes in real-time. It learns, it adapts, and it cruises ahead on to the next frontier.

“Not everybody can be right 100% of the time. When you take a wrong decision, and you realise you have taken a wrong decision, there’s no shame in taking a U-turn or going back because at the end of the day, nobody is keeping a track on how many times you took a U-turn, but what is more important is whether you did the right thing for yourself, for your team, your family, for your company and for users,” he says.

Thinking ahead

Xiaomi started local manufacturing in India in August 2015 with a smartphone called the Redmi 2 Prime. At that point of time, there was no significant tax difference between import versus manufacturing. The real reason why the company joined the Make in India bandwagon was so it could have tighter control over the supply chain and lower its working capital costs. By the time the government introduced the phased manufacturing programme (PMP), Xiaomi was already up to speed with local sourcing with the help of partners like Foxconn and Flex.

Then in 2018, the company hosted over 50 component suppliers from around the world to help them set up local manufacturing units in India. An incentive of this scale did not exist earlier, Manu says.

While a majority of its components ranging from Printed Circuit Board Assembly (PCBA) to camera modules are sourced/manufactured/assembled locally, Xiaomi has even bigger plans. The company is eyeing to make Tier 2 components such as camera sensors and battery cells in India in the days to come. Though, Manu is quick to add that this will take time, saying “every three to five years, we will have to keep refining our goals and we will have to keep going to the next level.”

Xiaomi’s manufacturing partners contribute over 30,000 employees and the company is extremely proud of the fact that over 95% of these employees are women.

“We have added about 10,000 jobs during the last one year. We have opened two new factories for smartphones with BYD and DBG, a new factory for smart TVs with Radiant Technology. We have strengthened our team and launched multiple new product categories,” he says.

Bringing Mi to you

For the longest period, a significant part of Xiaomi India’s portfolio was Redmi. This is because the market average selling price point (ASP) in India was not “big enough for us to grow the Mi portfolio.” That’s why every year, it would launch only one Mi product and then the majority of its products were Redmi. Until last year, the ASP crossed Rs 12,000 – this was around Rs 6,000 in 2014 – when the company decided, it was time to switch gears.

Also, the percentage of the market above Rs 20,000 crossed 10% only in 2019. This was hardly 3-4% in 2014. That was the second motivation. The third thing that changed for Xiaomi over the course of time was its own capability to sell flagships offline.

“A majority of Rs 20,000 and above products were traditionally sold only through offline because people want(ed) the touch and feel of it. We did not have any offline presence till about 2-3 years ago,” Manu says, adding “now that we are present in 15,000 shops, both from a market point of view as well as from our own capability point of view, we felt this is the right time for us to focus on Mi brand above 20,000.”

After an almost three-year long hiatus, Xiaomi launched a proper Mi-branded flagship phone – the Mi 10 – in India last year. It was quickly followed by the Mi 10T and Mi 10T Pro. Then came the affordable Mi 10i. This year, the company has launched the Mi 11X, Mi 11X Pro, Mi 11 Lite and its most ambitious phone to date, the Mi 11 Ultra.

The company used to have only 1-2% market share in the Rs 20,000-45,000 category. In the last 6-7 months, that number has gone up to 14% (as per data released by Counterpoint). Suffice to say, each of these products has done well, Manu says.

“Maybe we will do even more this year and then a lot more next year. But we will remain conscious about where the majority of the market is. We will have to look at each segment (20k-30k, 30k-50k, 50k and above) and try to win in each one of them.”

But whatever be the case, “you’ll see us being more and more aggressive and doing a lot more on the flagship side” going forward.

Manu is 100% confident that Xiaomi will be open to launching more ultra-premium phones like the Mi 11 Ultra in the future. He wouldn’t share any details about the Mi Mix 4 though, so fingers crossed there.

With 30% market share, Xiaomi is the largest smartphone brand in the country today. It is also the largest smart TV brand with 25% market share. And, the largest wearable brand, with more than 40% market share. The company holds a commanding 30% market share when it comes to power banks based on internal numbers. In the premium laptop category, it is number one in the Intel Core i7 thin and light category.

While all these good things have been happening at the India level, things are going exceptionally great even at the global level. Xiaomi has just become the second largest brand in the world, overtaking Apple. In the last quarter, for a month, it also became number one, taking the lead from Samsung.

The focus now is “to cement a place as a number two brand in the world and then try and see eventually if we can become the number one, and just launch a lot of new really cool products along the way.”

Also read | How Xiaomi bucked the trend to become the Tesla of smart TVs in India and what lies ahead

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First published on: 17-08-2021 at 13:07 IST
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